After Leaping 66% Electro Optic Systems Holdings Limited (ASX:EOS) Shares Are Not Flying Under The Radar

Electro Optic Systems Holdings Limited (ASX:EOS) shares have continued their recent momentum with a 66% gain in the last month alone. The last month tops off a massive increase of 206% in the last year.

Since its price has surged higher, given close to half the companies operating in Australia's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Electro Optic Systems Holdings as a stock to potentially avoid with its 1.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Electro Optic Systems Holdings

What Does Electro Optic Systems Holdings' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Electro Optic Systems Holdings' revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Electro Optic Systems Holdings.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Electro Optic Systems Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.9%. This means it has also seen a slide in revenue over the longer-term as revenue is down 14% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 23% each year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 10% each year, which is noticeably less attractive.

With this information, we can see why Electro Optic Systems Holdings is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Electro Optic Systems Holdings' P/S

The large bounce in Electro Optic Systems Holdings' shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Electro Optic Systems Holdings maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Electro Optic Systems Holdings that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.